Home Assignment

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Submitted to : Barrister Shaheen Ahmed ! Lecturer , North South University ! Submitted By , Name : Md.Osman Goni! ID: 103 0927 030! Course : Law 200 , Section : 10

Topic ! Company at law is distinct from its members. Directors or shareholders are neither agents nor trustees of a company.

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Introduction
A company is a legal entity that is separate and distinct from its members and shareholders. When a company is formed, it is said to have become "incorporated". [1] A company is capable of owning property, making contracts, employing people and being sued or of suing. Under the eye of the law, anything that is capable of rights and duties is a person and thus has a personality. Persons can be of two types under the eye of law (i) natural persons and (ii) artificial persons. Natural persons are human beings and artificial persons are those created for the purpose of laws known as corporations or companies. As soon as a company is registered under the company act, it attains the status of a person which can buy, lend money, file and defend suit, sell goods and hold property.The term company is used to describe an association of a number of persons, formed for some common purpose and registered according to the law relating to companies (Sen and Mitra). Section 3(1) (i) of the

Companies act, 1956 states that a company means, a company formed and registered under this Act or an existing company. According to Lord Justice Lindley is an association of members, the shares of which are transferable. (cited by Dhar, 2012). A company is one type of corporate body or corporation, which has the essential characteristics, in contrast to partnerships and other unincorporated associations such as clubs or societies, that is a legal person or entity distinct from its members. As soon as a company is registered under the company act, it attains the status of a person which can buy, lend money, file and defend suit, sell goods and hold property. But it has neither a mind nor a body of its own ( HALDANE LC, 1915, cited by Singh, 14th Ed.) Thus sec- 252 of the act requires that every public company shall have at least three directors and every private company shall have at least two directors.

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The nature of Corporate Firm
According to Sen and Mitra, companies can be two types- public and private. Limited by shares and limited by guarantee are parts of private company.

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1. Private company: a private company is one which, by its articles, a) restricts the right of the members to transfer their shares, if any; b) limits the number of its members (not counting its employees) to 50 and c) prohibits any invitation to the public to subscribe for any shares in or debentures of, the company- sec 3(1) (iii) Shares or guarantee may limit these companies. 2. Public Company: All companies other than private companies are called public companies.- sec 3(1) (iv). It can be divided into three types. They are-

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A company limited by guarantee: The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation during his membership or a year after conclusion of this membership, but otherwise they have no economic rights in relation to the company. Company limited by shares: in this companies fixed amount of capital is divided into number of shares and members liability equals the face value of his share. Unlimited liability company: A company where the liabilities of members for the debts of the company are unlimited. Today these are only seen in rare and unusual circumstances.

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After a company registers or is incorporated, it gains the following properties which supports the statement Perpetual succession: the members of a company may come and go but a company never dies. It is an entity with perpetual succession. The members and other peoples including the directors in the company may change from time to time but that does not affect the companys continuity. An incorporated company never dies. It is an entity with perpetual succession. Members of a company may come and go but a company goes forever. A member may die, may become an insolvent, he may withdraw from the company or transfer his shares to any other person, yet the life of company does not come to an end. For example A, B & C are the

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only members of a company holding all of the shares. Their shares may be transferred to or inherited by X, Y & Z who may therefore become the new members and manager of the company. But the company will remain same entity. Members may come and go but the company can go on for ever (Gower,75-76, note 40)

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Different personality or Independent Corporate Existence: Section 24 (2) of The Companies Act 1994, when a Company is registered it becomes a corporate large entity distinct from its member. So, a Company is an independent corporate existence; as soon as it is registered it becomes an individual with all legal rights, duties & liabilities. Under the eye of the law, a company is seen as having a different personality. It may employ people to work in its business, enter into contracts and incur debts. The members of a company own and control it but they are not parties to its legal transactions nor are they agents. The distinction between a company and its members is called the veil of incorporation. Its principle was tested and later established by the decision of the House of Lords in Salomon Vs Salomon & Co [1897] AC 22. Mr. Avon Solomon was an owner of a boot and shoe manufacturing business and later converted his business into a limited liability Company under the companies Act 1862. The memorandum of Association contained the names of subscribers- Solomon the appellant, his wife, a daughter and four sons, each of them subscribing one share. The company named Avon Solomon and Co. was incorporated on July 20 1892. Then the appellant sold his business to the company with fir a $10,000 in debentures and $20,000 in full paid up shares. Solomon was appointed the managing director of the company. Because of the depression in the show market, Solomon borrowed money on the security of the debentures and lent it to the company. Thereafter, the court wounded up the company and the assets of the company were not enough to pay back the debentures in full leaving nothing for the unsecured creditors. The Liquidator of the company claimed that the company was entitled to be indemnified by Solomon against the companys unsecured liabilities on the ground that the company was mere nominee and agents of Solomon. The trial judge made the declaration in favor of the company. Solomon then filed an appeal at the Court of Appeal. The court of Appeal agreed with the Trial judges and dismissed the appeal. Solomon appealed to the house of lord and then the order was

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ultimately reversed in order of Solomon. The point of consideration by the House of Lords in a very technical word was that when the memorandum is duly signed and registered, though there be only seven shares taken, the subscriber are a body corporate capable forthwith of exercising all the functions of an incorporated company The company is at law a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not in law their agent or trustee. This principle of separate entity and personality by a company has been recognized in India even before Solomon Case; The decision of the Calcutta High Court in Kandoli Tea Company. The principles stated in the above cases is that, as mentioned earlier, the company is at law different person and is not an agent of the subscribers or trustees and also, the companys motives and artificial existence is quite apart from the interest and motives and conducts of the subscribers. The main point of emphasize is that after a company is incorporated it is a different person and must be treated like any other independent person, with its liabilities, rights appropriate to itself. This can satisfactorily fulfill the fact that a company gains a separate personality after its incorporation. Ltd, Re 1886 seems to be first on the subject. Limited liability: The company, being a separate person, is the owner of its assets and bound by its liabilities. The shareholders or members are not liable except to the extent of their shares in the company. No member is bound to contribute anything more than the nominal value of the shares held by him (J.H. Rayner, 1989). According to the Companies Act 1994 of Bangladesh, the liability of the share holder may be limited by share under section 6(a) 4 or limited by guarantee under Section 7(a) (4). Separate property: Being a legal person the company is capable of owing, enjoying and disposing of property in its own name. The company becomes the owner of its capital and assets. The shareholders are not the several or joint owners of the companys property. Here the case of Macaura Vs Northern Assurance Co. Ltd 1925 can be mentioned- Macaura was a landowner who sold timber from his estate to a company of which he was the sole owner. He

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insured the timber that lay on his land in his own name as the person insured under the policies issued by the insurance company. A few weeks later the timber was destroyed by fire. Macaura claimed on the insurance policy. Northern Assurance claimed that the timber belonged to the company and as a consequence it was not properly insured. This point was forcefully made by Lord Buckmaster: no shareholder has any right to any item of property owned by the company, for that he has no legal or equitable interest therein. Transferable shares: Accordingly the Companies Act in sec-82 declares, the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. Moreover, the shares being transferable in the open market, the company need not pay money to the shareholder in exchange of his share; the clients are interchanging between themselves. In the company act this property of the transferability of shares is mentioned in Section 30(1) Capacity to sue and be sued: A Company, being a body corporate, can file a suit in a court of law and be sued in its own name. In case of criminal case, the company can file a criminal complaint but it must be represented by a natural name. A company has the right to protect its fair name. It can sue for such defamatory statements/remarks against it as are likely to damage its business or property, etc. Professional management: the corporate sector is capable of attracting the growth cadre of professional managers. Young management graduates join companies to belong to the managerial class. Their independent functioning as managers is assured because of the fact that there is no human employer and the shareholders exercise only a formative control and that also for the sake of name only. Financial Power: A company is given exclusive power and the only medium of organizing business, which is given the privilege of raising capital by public subscription either by way of shares or debentures. Moreover, public financial institutions or private investors lend their resources more willingly to companies than to other forms of business organization.

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Directors & Shareholders !

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A corporation works trough living persona not by itself. The human agencies that mainly run the companys business are called directors. According to Companies Act1994, Director includes any person occupying the position of director by whatever name called and according to section 90(1), every public company must have at least three directors and every private company shall have at least two directors [10] . The companies Act tries to distinguish the area of proper management control and proper shareholders control. But even, there is always conflict between shareholders and directors as to their respective powers which is the agency problem as in Automatic Self Cleansing Filter Syndicate Co. Ltd vs. Cunningham1906 Directors as agent: It is a well establish principle that directors are the agents of the company. Where the directors contact in the name of the company and on behalf of the company, it is the company which is liable on it, not the directors personality as in Ferguson vs. Wilson1866, The company has no person; it can act only through directors, merely the ordinary case of principal and agent. Directors as Trustees: Directors are always considered to be trustees of the property or assets of the company, which comes to their hand and which is actually under their control. They are to make good of moneys which they have misapplied as if they were trustees. Again in the case of exercising their powers, they are bound to act like a trustee for the benefit of the company only. Shareholders are the actual owner of the company. But when a company is formed and registered in the stock exchange under the company Act1994 it becomes a separate legal entity or personality. Then everything (ownership and liabilities) goes under the name of the company. No one is liable for any kind of act done by the company. It is totally a different entity. On the other hand directors are in the duty of managing the corporation. These directors may be form the shareholders or they can be employed as well. We can say the directors as employee of the corporation. They cannot be treated as agent or trustee of the company

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Case References

Salomon v Salomon & Co. case [1897]

Mr Salomon carried on a business as a leather merchant. In 1892 he formed the company Salomon & Co. Ltd. Mr Salomon, his wife and five of his children held one share each in the company. The members of the family held the shares for Mr Salomon because the Companies Acts required at that time that there be seven shareholders. Mr Salomon was also the Managing Director of the company. The newly incorporated company purchased the sole trading leather business. This was not an attempt at a fair valuation; rather it represented Mr Salomons confidence in the continued success of the business. The price was paid in 10,000 worth of debentures giving a charge over all the companys assets. That means the debt is secured over the companys assets and Mr Salomon could, if he is not repaid his debt, take the companys assets and sell them to get his money back. The company also issued 20,007 shares of 1 each. Mr Salomon thus held 20,001 shares in the company, with his family holding the six remaining shares. So, at this moment, Mr. Salomon has three types of role in the newly formed company: 1. Mr. Salomon was the major shareholder of the company. He had 20,001 shares out of 20,007 2. He was the Managing Director of the company. 3. He had 10,000 worth of debentures secured by all of the firms assets. That made him a secured creditor of the company. After a year, things were not going well for the company and Salomon had to sell his 10,000 debentures. But it was not enough to save the company. The company became insolvent.

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When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The judge,

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Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors. Decision Of the Court of Appeal The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability. When question arose about whether the debenture holders or the other creditors got higher priority on the assets, the decision was against the debenture holders . Decision of The Lords The House of Lords unanimously changed this decision, rejecting the arguments from agency and fraud. Lord Mcnaughton finally concluded that the company is a separate individual from its subscribers to the memorandum and although the business remain same as before, the company is not in law the agent or trustees of the subscribers. Significance of the Salomon Case The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in the western country courts, or common law jurisdictions. The case is of particular significance in company law thus: Firstly, it established the canon that when a company acts, it does so in it's own name and right, and not merely as an alias or agent of it's owners. Secondly, it established the important doctrine that shareholders under common law are not liable the company's debts beyond their initial capital investment, and have no proprietary interest in the property of the company. "The companyis a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company""

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Macaura v Northern Assurance Co. Case [1925]

The case of Macaura v. Northern Assurance Co. (1925) AC 619 seems to have served as vivid illustration of the impact of separate personality and limited liability. Mr. Macaura owned an estate and some timber. He agreed to sell all the timber on the estate in return for the entire issued share capital of Irish Canadian Saw Mills Ltd. The timber, which amounted to almost the entire assets of the company, was then stored on the estate. On 6th February 1922 Macaura insured the timber in his own name. Two weeks later a fire destroyed all the timber on the estate. Mr. Macaura tried to claim under the insurance. The Insurance Company refused to pay arguing that he had no insurable interest in the timber as the timer belonged to the company. Allegations of fraud were also made against Mr. Macaura but never proven. Eventually in 1925 the issue arrived before the House of Lords who found that the timber belonged to the company and not to Mr. Macaura. Even though he owned all the shares in the company, Mr. Macaura had no insurable interest in the property of it. Just as, corporate personality not only facilitates limited liability by making the debts belong to the corporation but also it means that the companys asset belongs to it and not to the shareholders. Therefore the House of Lords identified the following points: The House of Lords found that: The timber belonged to the company and not Mr Macaura Mr. Macaura, even though he owned all the shares in the company, had no insurable interest in the property of the company Just as corporate personality facilitates limited liability by having the debts belong to the corporation and not the members, it also means that the companys assets belong to it and not to the shareholders.

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Findings: The insurers were not liable. Only Macauras company, as owner of the timber,which had the requisite insurable interest in it. Only the company, and not

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Macaura could insure its property against loss or damage. Shareholders have no legal or equitable interest in their companys property.

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LEE V LEES AIR FARMING LTD (1961) AC 12 Case
Lee who was a pilot, who used to conduct an aerial top-dressing business, formed a company to conduct the business. Lee holds 2999 shares of the 3000 shares in the company. The remaining one share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was governing director with very wide powers. Workers compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aero plane crashed while engaged in aerial top-dressing. His widow made a claim for payment under the Workers Compensation Act 1922. Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a "worker" within the meaning of the Act. The Privy Council found that: The company and Mr Lee were distinct legal entities and therefore capable of entering into legal relations with one another. Mr. Lee and the company had entered into a contractual relationship for him to be employed as the chief pilot of the company. He could in his role of Governing Director give himself orders as chief pilot. It was therefore a master and servant relationship and as such he fitted the definition of worker under the Act. The widow was therefore finally entitled to compensation. Findings : Although Lees case is undoubtedly correct as a ruling in company law and in particular as the authority for the proposition slated above, however the question whether a person should be regarded as an "employee" of a company which he can control as a director or major shareholder may not always be clear-cut-for instance, in the context of the legislation relating to redundancy payments, the court may not consider that such a person is to be treated as an "employee" entitled to compensation for unfair or wrongful dismissal.

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The Cases for Lifting the veil of Incorporation

There are some cases which shows the adverse effects caused due to presence of the veil of incorporation. In such circumstances it is better to lift the veil of incorporation. For instance, in the case of Re Bugle Ltd. [1961] case it is seen that a the company is able to illegally buy shares of another company by a take over bid according to ss428-430 provisions when there is a veil of incorporation exists between the company and its members.

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Also in the case of Jones v Lipman [1962] case it is seen that the defendant tried to use corporate personality to escape some legal obligations. In another case of RE H and Ors [1996], the court of appeal had decided to lift the veil of incorporation when it found that the three defendants of the company tried to evade excise duty of 100M as they owned and controlled 2 companies which they used for their fraudulent activities. Therefore we can conclude saying that Subsequent to the decision (which has been followed), English law on this subject is accepted to be that the court may only lift the corporate veil in the following circumstances: 1. when the court is construing a statute, contract or other document; 2. when the court is satisfied that the company is a "mere facade" concealing the true facts; or 3. when it can be established that the company is an authorized agent of its controller or its members (corporate or human). The court cannot lift the corporate veil merely because it considers that justice requires it. Nor can it have regard to the economic reality, and regard a group of companies as a single entity.

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Important Corporate Personality concept from the cases

The mentioned cases demonstrate different aspects of corporate personality. From the analysis of those famous cases, some of the notions of corporate personality can be summarized here.

Company is not an agent of the shareholders. It is a legal person. That means, law considers it in such a way that, as if it is a person. (Salomon vs. Salomon)

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Company as a legal person, has its own debt and its own assets. (Salomon vs. Salomon)

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The shareholders have limited liability for companys debt and their personal insurance will not cover companys assets. (Macura vs. northern assurance co)

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Company is legal person, so it can engage in contractual relationship, even with the owners. The shareholders can become manger or creditor of the company. (Salomon vs.

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Salomon)

The company can even employ its owner/shareholder. (Lee vs. Lee)

Conclusion !
The question of whether the negative aspects of the decision in Salomon's case outweigh the good ones is best left unanswered for it is far too broad. One is inclined towards the view that the principle of separate legal entity established in Salomon's case has been instrumental in the development of modern capitalism and the immense social and economic wealth which it has generated. The House of Lords extended the principle so far as to cover small private enterprises. This move has had several negative consequences over time. However, it is also true that these have been largely neutralized by joint legislative and judicial action.Indeed, "the legislature can forge a sledgehammer capable of cracking open the corporate shell." And, even

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without statutory assistance, the courts have often been ready to draw aside the veil and impose legal liability on members and directors where to apply the Salomon principle strictly would lead to injustice, inconvenience or damage to government finances.Similarly, it should be pointed out that, following Salomon's case, all Australian jurisdictions, in a desire to ameliorate legal facilities for small commercial enterprises, introduced provisions for private companies into their corporate law. Experience since Salomon's case demonstrated that there was no reason why the benefit of limited liability should apply only to groups of business entrepreneurs. The Corporations Act takes this to its logical conclusion and sanctions the registration of one-person companies. In 1995, the First Corporate LawSimplification Act amended the Corporations Act to permit a proprietary company to be set up with one or more shareholders. Under another amendment, the minimum number of directors needed to be designated in a proprietary company was cut from two to one. Moreover, the Corporations Act states that any sort of company, not just a proprietary company, may be established with only one member and may continue to exist with only one member (section 114). It would appear then that the overall balance is positive and that the decision of the House of Lords in Salomon v Salomon & Co Ltd was a good decision.Despite numerous sophisticated attempts in recent years at providing theories which explain company law, it is noteworthy that we have not yet fully understood the essence of the corporate being. It will, suffice to say, that if three persons incorporate a company, the company will become a fourth person separate and different from these three persons individually or collectively. However when the company or corporate form is a sham or a mere faade concealing the true facts, the veil of corporate personality can be torn aside.

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!"#$"%&'()*+,
1. Arun Sen & Jitendra Mitra, Commercial Law and Industrial Law. 26th Edition, The World 2. Press Private Limited (2008) 3. Alan Dignam & John Lowry, Company Law. 5th Edition, Oxford University Press (2008) 4. Gower, L.C.B. and P.L. Davies Principles of Modern Company Law. (London: Sweet & Maxwell, 2003) 7th edition

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5. Company and Security law- Dr. M. Zahir. 6. Company law and partnership- Nirmalandhor Dhor 7. Company law -Avtar Singh

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